Levine on Wall Street: Selling Stock Without a License

Too big to jail too big to jail too big to jaaaaaaaaaaaaaaaaaaaaaail. Here is Floyd Norris being properly horrified at the whole bag of nonsense: "The obvious problem with ['too big to jail'] is that it is a non sequitur. Big or small, banks and other corporations are too inanimate to jail." He then goes on to point out various governmental waivers of "supposedly automatic consequences" of criminal convictions, and to wonder, "Does it matter that these will be criminal, not civil, punishments?" Norris, like the Justice Department, appears to think that the main consequences of a criminal conviction are regulatory consequences, which is kind of weird; banks can't live without regulatory licenses but they also can't live without customers, and customers may have their own restrictions on doing business with felons. Meanwhile here is a Voxsplanation of what federal prosecutors actually do for a living. Would you be surprised to learn that poor immigrants are just the right size to jail?

We think of Wall Street as being full of these crazy risk takers. But in a lot of schools it's these scared organization kids going to Wall Street. One thing Wall Street does that's really smart is they actually tell you way earlier than other industries if you got a job. They'll let you lock the job down in the fall of your senior year. So you can take that job on Wall Street or you can gamble on getting something after you graduate. ... The lesson of that is you don't have to pay people a ton of money to come to your program after college if what you're giving them still offers prestige and structure and the sense that they're not signing up for something forever. Teach for America has really approximated the banking model without the money.

Meanwhile here Felix Salmon praises Goldman Sachs's (and Bloomberg's and Google's, and Henry Ford's) pay practices, arguing that "a well-paid workforce is a happy workforce, which can build a truly world-beating company" and that two good indicia of smart pay are "high entry-level wages" and "a system whereby managers regularly earn less money than the people who report to them." I don't know that that last is "regularly" true at Goldman, but in general the financial industry is good at valuing producers as well as executives and managers.

Why are people overpaid?

Here is John Cassidy at the New Yorker with eight theories for why investors in hedge funds pay the fees that they pay. This is a follow-up to his post last week implying that pay-for-non-performance is how top hedge fund managers made their billions in 2013; that implication was false, but I guess you still need to explain why fees are 2 and 20 or 0 and 15 or whatever even in lackluster years. This list is good, though it is missing the simple efficient-markets theory that expected post-fee alpha for anyone anywhere is zero, so if your manager generates alpha he takes it in the form of fees, and if he doesn't, well, oops. Meanwhile Chipotle lost a say-on-pay vote, and its co-chief-executives only made $49.5 million between them last year, so I guess money managers are less generous with their agents than their investors are with them?

Do you think it's a little awkward that "Billionaire investors Warren Buffett, Daniel Loeb and John Paulson made a connection on Verizon Communications Inc., as their firms separately picked up stakes in the telecommunications firm amid a wave of deal-making in the sector"? On the one hand, it's nice to see that you have company. On the other hand if everyone's buying the same stocks what is your value proposition?

This is a Securities and Exchange Commission settlement with a guy named Behrooz Sarafraz, who went around finding investors and pitching them on interests in oil and gas partnerships. The partnerships are now bankrupt, so that's not great, but it's not the SEC's problem. The SEC's problem is that Sarafraz performed his securities pitching "without being registered with the SEC as a broker-dealer or associated with a registered broker-dealer." Anyway:

The SEC alleges that Opus and Tri-Valley paid Sarafraz approximately $18.3 million in sales commissions. He paid approximately $1.9 million to others as referral fees and kept the remaining $16.4 million for himself. Sarafraz has agreed to settle the SEC’s charges by consenting to entry of a final judgment ordering him to pay a total of $22,482,318.87 without admitting or denying the allegations.

Huh so I was once associated with a broker-dealer -- had my Series 7 and everything -- and I don't recall making $18.3 million in sales commissions. (Though unlike Sarafraz I didn't get "commissions that ranged from seven to 17 percent of the sales proceeds."1
) You can see why the SEC wouldn't want people to sell securities without a license -- "By failing to become associated with a registered broker-dealer, Sarafraz denied investors the protections of regulatory oversight and firm supervision," says an SEC guy -- but for me this story mostly shows that a lot of people selling securities without a license are probably better at it than the licensed broker-dealers. Someone should really hire this guy to go legit.

Recording the quotidian details of my day seems to add hours a day to my life: I’m not sure why. Another trick is to focus on some ordinary thing -- the faintly geological strata of the insides of a burrito, for instance -- and try to describe what I see.

1
And though, like Sarafraz, the deals I worked on occasionally ended in bankruptcy.

To contact the writer of this article: Matt Levine at mlevine51@bloomberg.net.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.

Matt Levine is a Bloomberg View columnist writing about Wall Street and the financial world. He is a former investment banker, mergers and acquisitions lawyer, and high school Latin teacher.
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